India among best of all EMs; China quite weak: Citi

India has been lucky to not witness a sell-off like other emerging markets and it is clearly among the best of all EMs, says Pankaj Vaish, head-markets and securities at Citi South Asia. However, China, according to him is quite weak despite its GDP growing 6.8 percent year-on-year (YoY) in the third quarter. That is the thing with China, the real numbers is much lower than the data released, he told CNBC-TV18.

On the brighter side, he says the US Federal Reserve inaction in the last policy boosted flows.

Coming back to China, he says the debt situation there is problematic.Below is the verbatim transcript of Pankaj Vaish' interview with Latha Venkatesh on CNBC-TV18.Q: For the moment what we have positive is that funds have once again started flowing into emerging market kitties into gem funds after a gap of some 13 weeks. Now this is probably because the FEDs rate hike has been pushed back. What is your sense, should we expect these funds into emerging markets (EMs) and into India to continue for a goodish bit?A: The global backdrop you are correct. The fact that the FED in September could not hike, that has given a bit of a all clear and then when you had the non-farm payroll report I think it looked to a market participants that the FED may not be able to go for many months. So, people who, we did not notice it so much in India but if you look at Brazil where government bond yields were going in double digits and the currency had gone to 4.25 which used to be below 2 just a couple of years ago, so when you start getting those kind of values, I think people felt at least a bit brave that they could step in again. It has been quite a bloodbath in Ems this year. I think in India we have been fairly lucky that we haven’t experienced a big chunk of it but most EMs have had a very bad time including some in Asia. So, this gave a little bit of a comfort to market participants. India will definitely be a beneficiary of it and India is clearly among the best of all EMs.However I think these hedge funds are being quite careful in terms of picking a part, which country they want to get into. There are still serious issues with South Africa, with Russia even China of course. So they are being quite picky about which EM to get into but India clearly is among the best and so we will be beneficiaries of that.Q: We have got Chinese gross domestic product (GDP) numbers. Came in at 6.9 versus the polls of 6.8, even the quarter-on-quarter (Q-o-Q) numbers are better. Is it that China is not going to be the big negative force it has been year-to-date (Y-T-D)?A: Our view at Citi for sometime has been that China is quite weak. We think the real numbers may be far lower than this. We had our offsite in Shanghai at the end of July. When I came back from that, I mentioned it in an interview also that some of our friends over there are thinking that the real GDP growth maybe below 5 percent.The thing in China is you can pretty much get the number you want. So you have to be a bit careful with it. Given that the Federal Reserve in September ended up mentioning China so many times in the press conference more than they wanted to but now that the market community believes that they have tied themselves to China, watching China has become very important. The reality is there is a clear deceleration in China, whether it comes two tenths better than peoples expectation is not important.They have done something quite messy on the currency front which net-net people have not been able to figure out what it achieves. They say they are trying to become a lot more open market oriented -- if you believe that that is fine, we can give them that benefit of the doubt but then what they did on the Chinese offshore yuan (CNH) and bringing it below Chinese yuan (CNY), it has led to a lot of confusion -- not the confusion that a major economic super power should be propagating in the market place.So our own view is that the domestic economy is fairly weak. They are trying to orient more towards the services sector away from manufacturing. That transmission is not easy, in a command economy still it can be a bit easier but still it is never easy. The asset situation, the debt situation is still extremely problematic.So we are still very concerned about Chinese growth. You can still always have one-two quarters of better than expected because people have brought down their expectations but we are concerned about the Chinese market.Q: Where does that leave smart money. If the numbers out of US have been a little weak and which is why we are seeing slight incremental shift of money from developed markets (DMs) to EMs, where does money go, are we going to see a significant shift from DMs to EMs, how do you look at the fund flows?A: I think that will clearly be one theme but you do need that backbone of support in terms of central bank still maintaining a lot of liquidity, that will be very important. I think that is the crux of the matter.The other is going back to even equities in the DMs, you had quite a correction from 2100 to 1850 in the S&P and that has the potential if the FED is all clear but growth is still in the 2.5 percent real number then that again is a supportive backdrop. I think we may be creating a problem for the longer term in terms of valuation but where money flows quarter to quarter I think equities in developed markets are still one where people will want to get back in. I think the FED has kind of missed an opportunity in September. The whole world was ready but to tie themselves to China which again in the press conference Yellen ended up having to say that so many times, so you leave the impression that now you are susceptible to what is happening in China. China can print 8 percent next year if they wanted to. So, you are making yourself unnecessarily vulnerable because six years of not being able to get inflation higher means that this Phillips curve that we keep looking at, we need to do some more analysis on this. Is this really helping us now - zero interest rate. Anybody who had to refinance must have refinanced by now. All households have refinanced their mortgages, corporate's have refinanced. So, what is zero interest rate achieving for you? May be some work needs to be done on whether higher interest rates will help at least on the retired side which is a substantial population and get some income effect out of that going.This mindless correlation constantly saying because inflation is not going higher thus we have to keep rates lower must be fully reassessed that at zero bound does that still apply or not.At the Jackson Hole conference there were a couple of papers presented around this and they are bringing out the big guns, they are talking about sun spot analysis, the reality is that all forecasts by all major central banks around the world have been spectacularly wrong. So, India is not alone in that, FED, ECB, BoJ, their forecast of where inflation is going to go has been spectacularly wrong. So, clearly some humility, there is enough humility  to go around, everybody needs to stop being discourteous and patronising to people who disagree with them and realise that we don't know, we are in very uncharted territory. We need to understand are these correlations still working and if they are not working we may be actually doing more damage. At some stage a fourth QE or fifth QE is just not going to have an impact of the kind you want but has real costs associated with it. So, that analysis will need to be done.          Q: We have seen the re-emergence of fund flows into emerging markets primarily because of the FED pushing back. Do you think that can continue for some time? The  FED fund futures rate were indicating a 50 percent chance of a FED rate hike in December, now that has dropped to 30 percent, for October it has dropped to 2 percent. So, do you think therefore dollar may remain weak for a couple of quarters and therefore the fund flows into EMs can continue for the next couple of quarters?A: Dollar has had a different behaviour versus other majors as opposed to versus the EM currencies. I think the dollar can remain a bit weak versus some of the other G10 currencies. However when it comes to EM, people are a bit cautious. I think there is a clear segregation now of people who are EM dedicated  or who are more aggressive on the hedge fund quadrant, they will definitely find value at these levels given the combination of currency and  yields in Brazil, South Africa, Poland, I think they will dip their toes a little bit. In the majors you have the possibility of dollar remaining weak for a while because the FED has in a sense talked about how they are really not ready yet.Q: Therefore how would you see the rupee's trajectory?     A: Rupee is in a very comfortable position. Our underlying trade situation is quite good. So, our economists are still looking for only one percent trade deficit and a balance of payments surplus of about two percent. The interest differentials are still pretty decent. So, 2-3 percent depreciation over a year is probably a decent place to be and that also keeps sufficient interest for FII investors. When the limits got opened up they got taken up at a pretty high price. To pay 65 paisa upfront is pretty serious, that is 15-16 basis points on a five year bond running. So, it is pretty substantial premium that they paid. So, that way we are in a very comfortable position on the rupee.Q: Speaking about Indian markets itself, it is not just Foreign institutional investors (FII) fund flows have turned positive, domestic institutional investors (DII) have been domestic institutions have been the big support of this market. Do you see that continuing? We saw a few days of sale but otherwise the flows were cointinuing.A: We have actually done some work on this and not just equity flows but overall. We think professional assets under management (AUM) in India are just way to small as a ratio of GDP versus the developed markets. So, we think there are a couple of catalysts that are going to push people away from the traditional competition in real estate and gold into financial assets. With this entire black money legislation and with the tough punishment that it comes, so hopefully people will, that support will be gone from those markets and secondly, the next generation is financially more savvy, more educated and is willing to hopefully pay for professional advice which is what my friends in the asset management industry keep lamenting that people just in India do not want to pay. But now you are seeing these flows finally after so many years coming back in. Obviously, the government’s election last year was an important turning point. But there is no reason if when you have 30 percent savings to GDP and even if five percentage points of that 30 goes into the equity market, why you cannot have tens of billions of dollars a year. I mean, they definitely should dwarf FII flows. We are not a small country. We are a very big country.So, I am happy for my friends in the asset management industry and I think this trend should continue. There will be months, even quarters where you will have outflows because people are unhappy, they want a little more clarity on the legislation side. But as a secular trend, I think the catalyst of anti black money of real estate prices getting some sense knocked into them, gold prices globally remaining calm, and then the rupee remaining stable, all of that means people will look at other asset classes and these DII flows should definitely continue that after a while we will even stop worrying about what FIIs are doing. That will be the day I look forward to.Q: Does that put a bottom to this market for the moment and what is the top for this market 12 months down the line?A: I think the big technical support was around 7,000 and we bounced ahead of that which is the mark of a market that is resilient and frankly for us to sell off it was a little bit more in sympathy of what was happening in the global markets, there is some legislative disappointment, that is fine. Earnings are a bit tepid but again my strategists keep telling me this is the bottom and it is going to improve form here. I was relieved to see the Reserve Bank of India (RBI) finally do a 50 basis point. I had said in an interview we are taking the scenic route but we will get to the right place. So I think all those delays on the rate cuts were the scenic route and finally we are coming to the right place. We think there should be another 50 basis points over the next 6-9 months, the room is there and so the supporting things are coming together. I just wish that the legislative agenda would move a little bit faster.Q: Therefore what? Is it 9,000, 10,000? What can we hope for in the 12 months? A: You need to get to 9,000 first to get to 10,000. I think in the next 12 months we should go back. In fact in the next 3-4 months I hope we will go back to the old high of 9,000 and then depending on what happens in the Rajya Sabha makeup, we should be on our way higher. But let us just first see us regain the old high, which we should and then these elections are important, some of the state elections.Q: 9,000 in 3-4 months is extremely optimistic. What happens if Bihar turns negative? Will that stymie all efforts to reach 9,000?A: It will be a disappointment mainly because Bihar is a big state. Actually my economists tell me it does not change that many seats in Rajya Sabha for next year. But I think it will be a disappointment that the whole excitement with BJP, Delhi was obviously was a very main massive outlier but if a big state like Bihar, where campaigning has been quite intense, if that does not go the BJP way, I think there will be some disappointment that what does it mean for the wider country, so that just means that it will take longer to get to 9,000 because in terms of reality on the ground like I said, in terms of Rajya Sabha seats from Bihar for next year I was told only 6-10 get influenced and the fact that they have won Maharashtra, Rajasthan in the past. Those coming up next year will provide the big impetus.But sentiment wise I agree with you, it will be disappointing. Then it might look like it will also embolden the opposition and maybe some of these bills don't even get through the next session and maybe they get delayed the session after that. So, that will be the thing people might watch.Q: It might therefore stymie or prevent us from reaching 9000?A: It will just take longer. But eventually the big picture is still very positive. With RBI finally sort of watching the global situation and realising that we had fair amount of room, you know I have talked about how far the rates have been. So, I was glad to see that finally come through.To your first question that there are not that many choices that foreign investors have. Where does the money go? So, when you look at that and our valuations are not insane right now. So, this is a good play from the currency stable that you can attract people here.Q: Where in India? If it is 9000 what will take us there and at the moment actually the midcaps have done better than Nifty itself than the index. So, what should be the horses you should bet on?A: Our strategists are still looking at financials, pharma as the sectors to be strong at. Financials had quite a correction. This bond market rally with RBI being supportive, hopefully the NPA problem some good progress being made there, transmission on base rate. So, that is an interesting one that is being thought. But there is clearly something between Ministry of Finance and RBI there has been some understanding. But the banks are pushing hard on the base rate.But overall the big issue there is NPA and as far as those seem to have put in a bottom, the problem seems to have put in a bottom the sectors still look good.Q: You do think NPAs probably have peaked?A: I think so. The economy clearly has bottomed and a lot of corrective action has already been taken. Assets have been recognised. So, in terms of ratios I expect them that they have peaked.Q: But which is that earnings turning quarter. Is it this, is it next and what are you all going with in terms of earning growth?A: Our strategist Aditya Narayan has for this year, just under nine percent for this fiscal year. For next year he has about 14-15 percent. In terms of quarter wise I am not sure where he is expecting a bottom. I don't know at the top of my head but he sees that sort of an acceleration going forward.Q: At one point in time we thought there is a V-shaped recovery coming. Is that hope still there?A: V-shape is going to be difficult. I just think there is still enough global headwinds. Clearly exports are not growing for anybody and which is why this whole INR debate that used to go on, let us weaken the currency I thought was pointless because do we really think when Chinese exports are collapsing 20 percent year-on-year we are going to depreciate a little bit and be able to take on China. The heart of the matter is that the area you want to export to they are barely growing. So, to me that is a major headwind.Secondly, with the political situation we talked about with the logjam on the legislative front that is a bit of a problem and rates were just too high, I am glad that that has gotten moving. But to get to eight percent right away - and remember we got a bump up because of that methodology change to get to a true eight percent right away may be a bit difficult.Q: One of the big things going for India was soft commodity prices. Does that continue in 2016 according to you?A: It does. If you put our view on China along with the fact that you don't see even on the energy front, which is where some people were getting excited or the precious metals front, you just don't see sustained rallies going on. So, our view is that given how weak growth is in all major markets, in Europe, in US, Japan, China that you are going to still have problems on commodity prices going higher, problems for the producers. So, yes, we will still remain beneficiaries on that front.